Optimizing cut-off grade considering

grade estimation uncertainty – A

case study of Witwatersrand gold-
producing areas
by C.C. Birch
Affiliation:
S chool of Mining Engineering,
1

University of the Witwatersrand,

South Africa.

Synopsis
Correspondence to: Due to grade estimation uncertainty, two statistical errors can occur. The Type I error is where material
C.C. Birch
is classified as ore and mined, despite the true value being below the break-even grade. This material
is dilution. The Type II error is where the material is estimated to be below the cut-off grade and is
Email: classified as waste, although the true grade is actually above the break-even grade. This material is not
clinton.birch@wits.ac.za mined and is lost. The uncertainty was assumed to follow a normal distribution in a previous study. For
this study, estimated block values are compared to those determined after mining (the best estimate
of the true grade). This actual data from four mines shows that the uncertainty follows a Laplace
Dates: distribution. There is no single solution regarding adjusting the cut-off grade away from the break-even
Received: 13 Oct. 2020 grade, considering estimation uncertainty, that could be applied to all gold mines. However, adjusting
Revised: 16 May 2022
the cut-off grade downwards (up to 22% for one mine) is noted when optimizing the profit considering
Accepted: 16 May 2022
grade uncertainties. This type of adjustment could open up significant mining areas and extend the life
Published: July 2022
of the mine.

How to cite: Keywords

Birch, C.C. 2022
uncertainty, Type I error, Type II error, cut-off grade, optimization, NPV; simulation, mixed-integer
Optimizing cut-off grade considering
grade estimation uncertainty – A
linear programming, @Risk, Excel Solver.
case study of Witwatersrand gold-
producing areas.
Journal of the Southern African
Institute of Mining and Metallurgy,
vol. 122, no. 7, pp. 337–346
DOI ID:
http://dx.doi.org/10.17159/2411- Introduction
9717/1403/2022
This study is a follow-up to a previous investigation (Birch, 2017) in which cut-off grade optimization was
undertaken for four South African narrow, tabular (Witwatersrand-type) gold mines while considering
various hypothetical degrees of uncertainty. It was found that where there are higher degrees of
uncertainty in the grade, reducing the cut-off grade compared to the break-even grade can improve the
financial returns. For the present study, the break-even grade is considered the grade where the income
from a mining block will cover all its mining and processing costs (as defined by the all-in sustainable
cost (AISC)). The management team uses the cut-off grade to determine the areas to be mined or left and
effectively split ore from waste. This study considers the actual grade uncertainty for four South African
gold mines. Each case study determines how the cut-off grades should be adjusted compared to the
break-even grade when taking grade uncertainties into account.

Background
Some mining companies apply the concept of break-even grade to individual ore blocks and assess if
each block could be exploited profitably. This break-even grade is then applied as the mining cut-off
grade (Minnitt, 2004) with some adjustments. With these approaches, the overall grade of the material
being mined becomes the average grade of the blocks above the break-even-derived cut-off grade. An
alternative approach is to apply the pay limit principle where the overall mining grade required to break
even financially is determined. Then the profit margin required is determined and added to the break-
even grade. The mining planners then check the mix of the various mining areas to ensure the required
mining grade is achieved.
However, these approaches fail to consider the interaction between the royalties for mineral
resources and the South African gold tax formula, which varies considering the mine’s overall
profitability. A revised approach to optimizing the value of gold mines was required as part of a research
project to understand the impact of the 2008 Mineral and Petroleum Resources Royalty Act on gold

The Journal of the Southern African Institute of Mining and Metallurgy VOLUME 122 JULY 2022 337
Optimizing cut-off grade considering grade estimation uncertainty
mines (Birch, 2016a). Considering the mine’s current planned
economic and production profile, this approach considers the
entire cash flow and optimizes overall profit or net present value
(NPV) for the Measured and Indicated Resource. The financial
optimizer uses mixed-integer linear programming (Excel Solver)
to maximize profit or net present value NPV by varying the cut-off
grade. This, in turn, alters the overall tonnage and average mining
grade (AMG) above the cut-off grade. The approach is simple,
robust, and provides a valuable tool to quickly assess the impact
of grade uncertainty without the need for extensive information
from the mines themselves (Birch, 2016b).
The grade for each mining block is estimated by sampling
the mineral deposit and projecting the values into the area to
be evaluated. Various techniques are used, including nearest
neighbour, inverse distance squared, and kriging. The estimated
value is used to determine if a mining block is classified as ore or
waste. There is, however, a degree of uncertainty regarding the
estimated value due to sampling spacing, deposit heterogeneity,
and the method of estimation used.
Accepting a hypothesis that should have been rejected is
a Type I error in statistics. The alternative error is rejecting a
hypothesis that should have been accepted, and is called a Type
II error (Underhill and Bradfield, 1994). Due to uncertainty in
the estimation, the same two errors can occur. The Type I error
is where the material is classified as ore and mined, although the
true value is below the cut-off grade and thus this is waste material
and constitutes dilution. The Type II error is where the material is
estimated to be below the cut-off grade and is classified as waste,
whereas the true grade is above the break-even grade and it could
have contributed profits if it had been mined. This material is not
mined and is lost (Minnitt, 2017).
Problem statement
High uncertainties characterize mining projects. Such
uncertainties vary in magnitude and are very prevalent in the
geological data and subsequent grade estimation on which
the project is based. The method of handling uncertainty in
mining projects may significantly affect the decisions made by
the management team (Kühn and Visser, 2014). There is no
straightforward process for adjusting the cut-off grade away from
the break-even grade for narrow tabular orebodies, considering
the uncertainties related to the grade estimation.
Previous work
A previous investigation (Birch, 2017) aimed to determine what
adjustment should be made to the cut-off grade to reduce the
financial impact of dilution or lost ore in typical narrow, tabular
Witwatersrand gold mines. Three possible options were identified:
➤ Raise the cut-off grade to reduce the dilution – ‘the old
adage that a low-grade ton should never keep a high-grade
ton out of the mill’ (Minnitt, 2017)
➤ Keep cut-off grades the same, considering that the Type
I and Type II errors would balance each other if there is
no bias
➤ Lower cut-off grades to ensure all value from the
orebody is obtained (thus recovering a higher
percentage of the lost ore).
The mines reviewed all have mining block listings. These
listings include the area (m2), channel width (cm), and the
estimated in-situ grade in grams per ton (g/t). The tonnage and
stoping width can be determined from these values, along with
338 JULY 2022 VOLUME 122
the mining grade and expected metal content. South African gold
mine block listings were run through a simple financial optimizer
for the previous study. Various degrees of uncertainty for the block
grades were considered. This uncertainty was introduced using
@Risk software (a Monte Carlo simulation program developed
by Palisade). The uncertainty distribution was assumed to be
symmetrical, and no bias was considered (100% block factor). The
databases used for this research exercise had been corrected for
conditional bias and smoothing (Tolmay, 2014). The uncertainty
dispersion was controlled using the standard deviation to give 5%,
6.7%, 10%, and 20% uncertainty.
The following points were noted.
➤ It was found that when optimizing for profit, three of
the four mines would benefit from a reduction in the
cut-off grade compared to the break-even grade.
➤ This reduction ranged from 2–10%. The fourth mine
would not benefit from any change in the cut-off grade.
➤ When optimizing for 9% NPV, three of the four mines
would benefit from reducing the cut-off grade by
between 7 and 27%. The fourth mine would benefit by
increasing the cut-off grade by 7%.
➤ When optimizing the NPV at 12%, the one mine would
benefit from an 8% decrease in the cut-off grade. The
NPV benefit is, however, only 1.3%. The other three
mines would not benefit from adjusting the cut-off
grades and using the model results in NPVs lower than
not adjusting them, as indicated in two cases.
The previous study assumed that the uncertainty follows
a normal distribution, and there is no bias present in the
estimations. This research uses ‘actual’ uncertainty distributions
to determine if the same conclusions can be drawn.
Methodology
The mining block listing is the starting point for the financial
model used for this study. This mining block listing contains all
potential mining areas, estimated grades, and volumes created
from the geological block model. For South African gold mines,
the mining blocks are the same size as the geological blocks
(typically 30 m by 30 m for the Measured Resource blocks and
60 m by 60 m for the Indicated Resource blocks).
The determination of the break-even grade is, in essence,
quite simple. It determines what grade a unit of ore requires to
return a profit. This is basically a break-even volume measurement
where the quantity is known (usually limited due to shaft capacity,
milling capacity, or other physical constraints). The unknown
is the commodity’s in-situ value. The other factors needed for
the calculation of the break-even grade are the mine recovery
factor (MRF), which is the mine call factor (MCF) multiplied
by the plant recovery factor (PRF). The metal price is quoted
in US dollars (for gold and silver, in troy ounces). These are all
projections and open to variation over the time over which the
break-even grade is applied. Therefore, they contribute to the
investors’ financial risk if they change significantly. This can be
expressed as follows (School of Mining Engineering, 2021):
At break-even grade:
TR = TFC +TVC
but
TR = UR* X
and
TVC = UVC * X
The Journal of the Southern African Institute of Mining and Metallurgy
Optimizing cut-off grade considering grade estimation uncertainty
Therefore:
UR * X = TFC + UVC * X
Dividing both sides by X:
UR =(TFC÷X) + UVC
But
UR = g/t * r * p
Therefore at break-even grade (g/t):
g/t = ((TFC÷X) + UVC)÷(r*p)
where g/t is the break-even grade in grams per ton; r is the mine
recovery factor in %; p is the metal price in US$ per gram; TFC is
the total fixed costs in US$; X is the milled tons; and UVC is the
unit variable costs in US$ per t.
The cut-off grade is an extension of the concept of a break-
even grade. If only blocks above break-even grade are mined, this
becomes the cut-off grade. However, the cut-off grade undergoes
variations over the mine’s life. Hall (2014) describes the basics
of cut-off grade theory. This book is an exhaustive study of the
different techniques currently used in the mining industry. It
includes various value measures, including discounted cash flow
(DCF) and optimization of NPV. The South African Code for the
Reporting of Mineral Asset Valuation (The SAMVAL Code) income
approach to valuation requires a mine design with reasonable
estimates of expected tonnages, grades, costs (fixed and variable),
and recoveries (Border, 1991).
The cost of capital is usually calculated by the weighted
average capital cost (WACC) and is expressed as a percentage.
The WACC represents a company’s average cost of capital from
all sources. These include equities (common stock, preferred
stock, and bonds) and other forms of debt. The cost of equity can
be determined using various methods, including the capital asset
pricing model (CAPM) and the Gordon growth model (GGM)
(School of Mining Engineering, 2021). The cost of capital of the
mine is used as the discount rate for cash inflows and outflows.
The NPV is the difference between the present value of cash
inflows and the present value of cash outflows over a period of
time (Investopedia, 2021). Real monetary mining discount rates
of between 9% and 12% are suitable for South African mining
projects (Smith et al., 2007). That is equivalent in nominal terms
Figure 1—The Witwatersrand gold-producing areas in South Africa (Minerals Council South Africa, 2020)
The Journal of the Southern African Institute of Mining and Metallurgy
to 14.5% to 17.6% at an annual inflation rate of 5% (typical for
South Africa).
The financial optimizer used for this study utilizes linear
mixed-integer (Excel Solver) programming. Due to its availability
to all Excel users, the Solver function built into Microsoft Excel
was selected for this study (Meissner and Nguyen, 2014). The
variable for the Solver function is the cut-off grade, and the Solver
function is set to optimize the cut-off grade to maximize the
resulting profit or NPV. These cut-off grades are then compared
to the base break-even grade to indicate how the cut-off grades
should be adjusted considering the uncertainty in the estimated
in-situ grades.
Sources of data
Historical mining block listings were obtained from four gold
mines for this study. The mines are located in the West Rand and
the Free State gold mining regions of South Africa (Figure 1). They
all mine the narrow, tabular gold-bearing conglomerates of the
Witwatersrand Supergroup. For anonymity purposes, these mines
will be called A, B, C, and D. It is important to note that these are
not the mines that were used in the previous study. The data for
the previous research was for four individual shafts belonging to
two different mines. The data used for that study was the block
listing and financial information used for the mines’ Mineral
Resource Statements.
Accompanying the historical block grades for the mined-
out areas is the post-mining grade for the block. This grade is
considered the ‘true’ grade. Although it is still an estimate it is
the figure used by the mine surveyor to allocate the called-for
grade for the block. Discrepancies between the called-for gold
estimates and the final recovered gold are dealt with in the break-
even formula where the MRF is considered. The distribution
of the uncertainties was based on these listings. They display
a significantly different pattern from the normal distribution
assumed for the previous study (Birch, 2017), and significant grade
overestimation bias in three cases.
The relationship between the volume (tons) available for
mining and the cut-off grade, and the resulting average grade
above the cut-off grade, can be determined from the grade-
tonnage curve.
VOLUME 122 JULY 2022 339
Optimizing cut-off grade considering grade estimation uncertainty
A generic financial model has been utilized to compare a
typical deep-level gold mine producing 1.2 Mt of ore per annum. A
generic financial model has been used to highlight the effect of the
uncertainty and allow direct comparisons as to the effect of this
between the different mines. A gold price of US$ 1500 per ounce
is assumed for this case study. For all the examples, annual fixed
costs are assumed to be US$260 million, and the variable cost is
US$55 per ton. The split between fixed and variable costs is 75:25.
A feature of South African gold mines is that labour costs are
typically 50% (Savant, 2012) of the total costs, resulting in a higher
fixed cost to variable cost ratio than more typical mining projects
where a 50/50 split would be appropriate (Poxleitner, 2016). The
annual production rate and 75% MRF have been selected to give
a break-even grade of 7.5 g/t. Break-even face grades of 7.5 g/t
are typical for deep-level South African gold mines and fit into
the break-even grades determined from the detailed financial
figures used in the previous study (6.9–10 g/t). The NPVs were
determined using discount rates of 9 and 12%.
Analysis
Estimated versus true block grades
The approximate value for one mining block and the true value
will be the same in a perfect world. There will be no blocks above
the cut-off grade with a true value below the cut-off grade (Type I
error or dilution). There will also be no blocks calculated as below
cut-off grade that are actually above cut-off grade (Type II error or
missing ore). This ideal relationship can be seen in Figure 2.
The pre-mining estimated and post-mining true block grades
were obtained from four mines for this study. The number of
blocks included in the analysis ranged from 1757 to 2547 for the
respective mines. The estimated grades vs the true grades for the
four mines are shown in Figure 3.
It can be observed that there is significant overvaluation in the
estimated block grades for three of the mines. This is reflected in
the slope of the trend lines. For mine A, the slope is 0.85. For mine
B it is 0.87, and for mine C it is 0.86. This is significant because it
shows a clear bias in the estimation, which was not considered in
the previous study (Birch, 2017). For mine D, the bias is far less,
and the slope is 0.95. This overestimation of the block grades
has a marked impact on the suggested cut-off grade optimization
adjustments shown later in the analysis. The R2 values for the four
mines range from 0.54 to 0.69. This shows a significant spread of
the data-points and a poor correlation between the estimated and
true values. A perfect correlation would result in an R2 value of 1.0
(see Figure 2). This poor correlation results in numerous points
plotting in the graphs’ Type I (dilution) and Type II (lost ore)
areas.
The distribution which best fits the data was selected using
the Akaike information criterion (AIC) value. AIC compares the
relative ‘quality’ of a model (distribution) with the other models.
@Risk ranks the various distribution model outputs according to
this value. The distribution with the smallest AIC value is usually
the preferred model (BPI Consulting, 2016). Figure 4 shows the
Laplace and normal distribution curves for the four mines.
It is clear from the figures that the Laplace distribution curve
for the variation has a far higher kurtosis (the sharpness of the
peak) than the normal distribution curve in all four examples.
However, the normal curve reflects the mean variation of the
input data better. It shows that the grades for mines A, B, and C
are over-estimated by 0.8, 0.4, and 1.0 g/t, respectively. Only mine
D has an overall variation of less than 0.1 g/t. Over- or under-
estimation is often reflected in the block factor value, with 100%
indicating no bias. These block factors were found to be 94.3%,
93.2%, 92.4%, and 99.0%, respectively for the four mines.
This overestimation of the block grades is very significant.
Many blocks are being identified as ore while they are sub-
economic and should not be mined. Suppose the overestimation
is carried through to the post-mining true grade estimation for the
blocks. In that case, the MCF will also be lower than expected. The
MCF is used in the break-even grade calculation. This will raise
the break-even grade.
Financial modelling
The tons above the cut-off grade and the AMG are determined
from the block listing as inputs into the financial optimizer. The
block lists obtained for these mines only contained the gold
grades in centimetre-grams/ton (cmg/t). Since the block listing did
not include block area, channel width, or stoping width, various
assumptions have been made. These assumptions are assumed
not to impact the validity of this study because they do not alter
the comparative nature of the results. The same assumptions have
been made for all four financial models used in the current study.

Variation distribution
The difference between the estimated and true grades for each
block was determined. The distribution of these variations is
analysed using the Palisade @Risk Distribution Fit tool. For the
previous study, normal distributions with no bias were assumed.
When the variation distributions for the four mines in this study
were analysed, Laplace distributions were found to fit better than
normal distributions. In probability theory and statistics, the
Laplace distribution is a continuous distribution of probabilities, Figure 2—Ideal world situation where estimated and true values are the
same (zero uncertainty). All the data-points plot along a single line. No
called the double exponential distribution. It can be viewed as two dilution or lost ore occurs. The break-even cut-off grade of 7.5 g/t is shown,
exponential distributions spliced together back to back (Hilali, as are the Type I and II error areas. It is noted that no points plot into
2016). these two areas

340 JULY 2022 VOLUME 122 The Journal of the Southern African Institute of Mining and Metallurgy
Optimizing cut-off grade considering grade estimation uncertainty
Figure 3—Pre-mining estimated vs post-mining true block grades for mines A, B, C, and D
Some companies model accumulation value (cmg/t) rather
than grade (g/t). Accumulation value is helpful for very narrow
orebodies because it gives the metal content, rather than just
the grade, over the mineralized width. The accumulation value is
calculated by multiplying the grade of the sample by the width the
sample represents. Multiple samples are taken and composited
when sampling narrow tabular orebodies to get the average grade
over the mineralized width. Each sample grade is multiplied by
the width (in centimetres), and then all the individual values are
summed. This combined value is then the value in cmg/t. This
value can then be divided by the expected mining width, and the
average mining face grade of the block determined. A 1000 cmg/t
over 1 m will result in a face grade of 10 g/t. It is possible then to
The Journal of the Southern African Institute of Mining and Metallurgy
compare the metal content with a very narrow 1 cm mineralized
zone with 1000 g/t (for example, the carbon-rich facies of the
Basal Reef) to one with a 100 cm mineralized width with a grade
of 10 g/t. Both faces will have the same mining face grade of 10
g/t if the minimum mining width is 100 cm. However, since this
parameter is not widely used except on South African gold mines,
it has been converted to grams per ton for easy explanation. The
expected face grade for this study was determined for each block
by dividing the cmg/t by a standard stoping width of 150 cm to get
the face grade in grams per ton.
This block area needs to exceed the smallest mining unit
size determined by the mine design approach. Typical mining
panels in deep-level South African gold mines are 30 m long.
VOLUME 122 JULY 2022 341
Optimizing cut-off grade considering grade estimation uncertainty

Figure 4—Variation distributions for mines A, B, C, and D. The sharp- Laplace distribution curves in the four plots (in red) can be and compared to the flatter
normal distribution curves (in green)

342 JULY 2022 VOLUME 122 The Journal of the Southern African Institute of Mining and Metallurgy
Optimizing cut-off grade considering grade estimation uncertainty
The block sizes have been standardized at 30 × 30 m (also the
Measured Mineral Resource block size). The specific gravity of
the quartzitic conglomerate ores on these mines is typically 2.72,
which has been used to determine the tonnage for each block.
The other parameters used for financial modelling were described
previously.
This study developed a model that can be optimized for
either profit or NPV. Optimizing NPV can drive decision-making
to focus on short-term gains at the expense of the longer term.
Therefore, companies frequently use the total undiscounted cash
flow (Hall, 2014). All four mines' financial models were run using
zero (undiscounted profit), 9%, and 12% discount rates. This is
consistent with the previous study, which used the same discount
rates. The NPV cut-off grade is higher than when optimized for
profit. The NPV optimization model favours high-grading mining
because of the discounting. This leads to a shorter mine life and
lower mineral resource extraction (Birch, 2016b).
The optimized cut-off grade obtained from the financial
optimizer excludes the estimated cost of the mineral resource
royalty ( South Africa, 2008) and income tax calculated using
the South African gold tax formula ( South Africa, 2019). The
purpose of excluding these financial liabilities from the model
is to consider profitability when determining the rate. Including
these in the model creates interesting interplays between the
optimal cut-off grade and these variable costs. This is the subject
of further research by the author. This interplay adds a layer that
is distracting from the purpose of this particular research project,
which is studying the role of uncertainty in optimizing the cut-off
grade.
The financial optimizer uses mixed-integer linear
programming (Excel Solver). The Solver feature is built into
Microsoft Excel. It was selected for this study due to its
availability to all users of Excel (Meissner and Nguyen, 2014).
Solver can be used to determine an optimal value (maximum or
minimum) for a formula in a target cell that is constrained or
limited by the values of other formula cells in a worksheet. Solver
adjusts the values in the decision variable cell (the cut-off grade)
to fulfil the constraint bounds of the cell and provide the desired
result for the target cell (the profit or NPV) (Microsoft, 2022).
Solver uses three algorithms (Microsoft, 2022):
➤ Generalized reduced gradient (GRG) nonlinear (for
problems that are smooth nonlinear)
Figure 5—An example of a grade-tonnage curve (mine D) with a cut-off of 7.5 g/t. The resultant tons above 7.5 g/t are 3.3 Mt, and the average mining grade is
13.8 g/t
The Journal of the Southern African Institute of Mining and Metallurgy
➤ LP Simplex (for problems that are linear)
➤ Evolutionary (for problems that are non-smooth).
It has been found for the financial optimizer model that
although the evolutionary approach is the slowest, it is the most
reliable. The GRG approach gives inconstant results, often not
changing the initial value input for the cut-off grade. The LP
Simplex approach has not been tested because the nature of the
model is not considered linear.
The financial optimizer determines the tonnage above the
cut-off grade and the AMG from the block listing sheet. The MRF
and ratio between stope tonnage and total milled tonnage are
obtained from the mines' ore flow sheets. These values form the
primary inputs into the cash flow sheet, along with the production
rate, metal price, and mining costs. As Solver's cut-off grade varies,
the tonnage above the cut-off grade and AMG inputs change to
maximize the target selected (profit or NPV). This relationship is
shown in Figure 5.
Mine D has been selected to demonstrate the grade-tonnage
curve (Figure 5). This is due to mine D demonstrating block
factors closest to 100% among the four mines included in this
study.
A grade-tonnage curve can be used to visually display the tons
above the cut-off grade and the average mining grade of the blocks
above the cut-off grade. A vertical line drawn at the cut-off grade
will intersect both the tonnage and grade curves. A horizontal line
drawn from the tonnage curve to the tonnage axis (the left side
in this case) will indicate the tons above the cut-off grade (3.3 Mt
in this case). These tons can be used as the tons available for the
financial model. A horizontal line drawn from the intersection
point with the grade curve to the grade axis (right side) will
indicate the average grade of all the blocks above the cut-off grade
(13.8 g/t in this case). This can then be used as the AMG for the
financial optimization model.
Results and discussion
Overall bias not considered
The model was set to replace the pre-mining estimated block
value with the post-mining true value for each block. The Solver
function was then run to optimize the cut-off grade. This exercise
was run considering both optimization for profit (zero NPV) and
NPV at 9% and 12%. Figure 6 displays how the cut-off grade for
VOLUME 122 JULY 2022 343
Optimizing cut-off grade considering grade estimation uncertainty
Figure 6—Profit optimization. The basic cut-off grade does not consider the grade estimation uncertainty, whilw the optimized cut-off grade considers the true
block values
Figure 7—NPV optimization. The basic cut-off grade does not consider the grade estimation uncertainty, while the optimized cut-off grade considers the true
block values
each of the four mines varies when considering the uncertainty of
the block values when optimized for profit (zero NPV).
It can be observed that only mine A shows a decrease in the
cut-off grade when the grade uncertainty is considered. In the
previous study, the overall tendency was that the cut-off grade
when optimizing for profit is lower than the unoptimized break-
even grade when uncertainty is considered. Figure 7 shows the
cut-off grade graphs optimized for 9% and 12% NPV.
The following can be noted.
➤ Both the basic and grade estimate uncertainty-optimized
cut-off grades are higher than the break-even cut-off
grade of 7.5 g/t, which is expected when optimizing for
either 9% or 12% NPV.
➤ The same trend as seen in the profit optimization is
observed in the 9% NPV cut-off grade optimization.
➤ Only mine A shows that a significantly reduced cut-off
grade is beneficial.
➤ For the 12% NPV optimization considering grade
344 JULY 2022 VOLUME 122
uncertainty, mine C shows a reduction in the cut-off
grade, while the other three mines show an increase in
the cut-off grade is preferable.
These trends indicate that the bias in the pre-mining block
estimation grades is significant and alters the previous study's
findings.
Overall bias considered
Mines A, B, and C had block factors significantly below 100%
at 94.3, 93.2, and 92.4%. Only mine D has a block factor close to
100%, at 99.0%. The distribution model used in the previous study
to determine each model's true grades assumed a block factor
of 100%. Considering this study's initial optimization exercise
results, the impact of the overall bias in the estimated block
grades needed to be considered.
Whether to mine a block or not is based on the estimated
grade. Suppose the overall tendency is to overestimate the block
grades. In that case, more blocks will be considered ore than is
The Journal of the Southern African Institute of Mining and Metallurgy
Optimizing cut-off grade considering grade estimation uncertainty
Figure 8—Profit optimization following correction to the bias to bring the block factor to 100%. The basic cut-off grade does not consider the grade estimation
uncertainty, while the optimized cut-off grade considers the true block values
Figure 9—NPV optimization following correction to the bias to bring the block factor to 100%. The basic cut-off grade does not consider the grade estimation
uncertainty, while the optimized cut-off grade considers the true block values
actually the case (Type I error), which will add to the dilution.
Mines should constantly consider their block factor and adjust
their evaluation parameters to reduce this bias. If the same
technique is used to evaluate the blocks post-mining, this will
reflect an apparent loss when determining the mine call factor
(de Jager, 1997).
The planned block grade is adjusted to bring the block factor
to 100% to correct this bias. This correction was applied to all four
mines. The model then selects the blocks based on this adjusted
planned grade rather than the originally planned grades. For the
profit optimization, the results indicate that two of the four mines
(mines A and C) would benefit from a significant downward
adjustment in the cut-off grade from the break-even grade of
7.5 g/t (Figure 8).
The following is noted.
➤ The reduction in cut-off grade is 22% and 9%,
respectively, for mines A and C.
➤ The other two mines (B and D) would require a 4–5%
increase in cut-off grade.
The Journal of the Southern African Institute of Mining and Metallurgy
For the exercise where the optimization maximizes the NPV,
the overall tendency is to reduce the cut-off grade from the cut-off
grade obtained without considering the uncertainty. This is shown
in Figure 9.
The following is noted.
➤ The indicated cut-off grade reduction for 9% NPV is 23%
for mine A and 7% for mine C.
➤ The reductions for mines B and D are minor at 1% and
3%, respectively.
➤ For the 12% NPV, the indicated cut-off grade reduction
for mines A and C is 4% and 14%, while for mine B there
should be a 2% reduction.
➤ No adjustment is suggested for mine D.
Conclusion and recommendations
The previous study (Birch, 2017) assumed a normal distribution
with no bias for establishing the grade uncertainty. This study uses
real data from four South African gold mines to establish whether
the assumptions and results from the previous research are valid.
VOLUME 122 JULY 2022 345
Optimizing cut-off grade considering grade estimation uncertainty
The true data indicates in all four cases that the distribution curve
of the uncertainty of the grade estimation follows a Laplace rather
than a normal curve. This ‘double exponential’ curve displays far
greater kurtosis than a normal curve with tails extending further.
In three of the four case studies, there is a significant bias.
This is displayed by block factors below 95%, indicating an
overestimation in the estimated grades. The initial financial
optimization exercise indicated that reducing the cut-off grade
was preferable in a single case for the profit optimization and
mixed results for the NPV optimization cases. This is contrary to
the previous study (where the optimization model indicated a cut-
off grade reduction was always preferable for profit optimization
and generally preferable for NPV optimization). In the previous
research the variances had no bias, and it was felt that the bias
was altering the trends. The bias was corrected to bring the block
factors for all four to 100%, and the exercise was repeated.
When optimizing for profit, two of the four cut-off grade
optimization models suggest a reduced cut-off grade by up to 22%
from the break-even grade when considering grade uncertainty.
However, no reduction was indicated for the other two mines, and
a slight increase (4–5%) is suggested. With the 9% NPV model, the
data from all the mines suggests that reducing the cut-off grade
is preferable. This reduction varied significantly from 1–23%. This
trend was also observed following the 12% NPV exercise, with
reductions between 2–14% in three mines. For the fourth mine, no
reduction in the cut-off grade is suggested.
It is recommended that all mines focus on their block factors
and other evaluation parameters to ensure no overall bias in the
block estimations. This bias could also be carried through to
estimate the mined grades (the true grade) and will result in gold
being called for that does not exist. This apparent loss will mean
an increase in cut-off grades.
Once the bias is corrected, running a financial optimization
exercise similar to this one, considering the grade uncertainty,
could unlock value by reducing the number of lost blocks. The
value of the lost blocks appears to be higher than the mining
losses incurred by mining more un-pay blocks by reducing the cut-
off grades. However, every orebody has a unique grade-tonnage
characteristic and financial circumstances. No single solution
could be applied to all gold mines, and the optimization strategy
(profit or NPV) also affects the outcome.
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